A test of investors’ patience

IN late September, China introduced a sweeping set of stimulus measures, encompassing monetary easing, fiscal boosts and support for the property market. This policy shift has stirred significant volatility in Chinese assets, revealing a divergence in views on the effectiveness of the stimulus.

While China’s equity markets have rallied notably since then, traditional China-linked assets like the Australian dollar and commodities have lagged, signalling that the impact of the stimulus may be different from past efforts.

Historically, China’s stimulus has been investment-focused, driving up demand for commodities and supporting commodity prices and currencies tied to China’s growth story.

However, the current stimulus targets hidden local government debt and domestic welfare, a shift that could reshape the impact on China-sensitive assets and ripple across the region.

Over the past few weeks, I’ve had the privilege of engaging with a range of investors, policymakers and academics across the region. These conversations reveal four core concerns among international investors regarding China’s stimulus approach.

First, volatility in China’s markets has spiked sharply over the past month, posing a significant risk for macro hedge funds, which prioritise long-term stability over short-term gains. With global volatility already heightened, taking on additional exposure to volatile Chinese assets may seem less attractive.

Second, foreign investors are now intensely data-driven, requiring concrete evidence of improved fundamentals or large-scale stimulus.

In the absence of clear data, they remain hesitant, awaiting specific figures that demonstrate the effectiveness of China’s measures.

Third, while China’s stimulus resembles a “whatever it takes” approach, some foreign investors are drawing comparisons to the 2008 US financial crisis response under Treasury Secretary Henry Paulson.

In that instance, Paulson introduced a US$700bil bailout alongside his assurances, bolstering credibility and restoring investor confidence.

China’s “whatever it takes” approach, however, feels more episodic, with each new policy step unfolding progressively, leaving investors to speculate on what’s next in the policy series.

Lastly, current priorities appear to favour dealing with local government hidden debt first, followed by the financial system stability, and finally domestic demand.

Yet, the execution of debt swaps – critical for managing hidden local government debt – remains ambiguous, introducing further uncertainty.

International investors’ cautious stance is understandable. To restore confidence, clarity around China’s hidden debt swap plan will be essential.

The pivotal question is whether this debt will be transferred to local or central government balance sheets.

If local government bonds are used, the transfer from local government off balance sheet to on balance could indeed reduce interest costs.

However, it’s uncertain whether this will translate into increased public spending.

The pathway from debt swaps to growth at the local level is often indirect and the long chain of reaction may dilute the effect of the stimulus.

On the other hand, should the central government agree to absorb these hidden debts through long-term special bonds, this could relieve local government fiscal burdens, counter revenue declines, and incentivise local officials to refocus on growth.

I anticipate that the National People’s Congress will approve expanded issuance of these special bonds. While the staggered rollout of stimulus may dilute its short-term impact, China’s commitment to “whatever it takes” for growth appears genuine.

This should give investors reason for cautious optimism going forward.